Creating and reporting balance sheets and income statements in accordance with clear, common rules is the DNA of any Finance Team. If you work with Finance, chances are these responsibilities will soon be extended to include mandatory ESG reporting.
The proposed Corporate Sustainability Reporting Directive, CSRD, might be the well-needed gamechanger for companies on EU markets – and for the survival of our planet. Here’s what you need to know.
ESG reporting (ESG stands for Environmental, Social and Governance) is a bit of a jungle. Who should do what, what should be reported, and how? The fact is that most companies do no ESG reporting, and those who do report mostly to the authorities with no public transparency. And the type of reported data can vary, to say the least. One of the consequences of this is that it is difficult for stakeholders to get hold of ESG information about companies they are about to do business with, including CO2 emissions, waste and fossil fuel dependency.
This will all change when the new CSRD replaces the current directive, the Non-Financial Reporting Directive (NFRD).
EU:s ambition is to harmonize all ESG reporting and provide a common framework for the information to be included. ESG information will be considered lead data, as data in the financial process, and as such signed off by the company board. So far, audits have not been mandatory and no regulations exist. With the new CSRD, the same auditor who signs off on the fiscal report will also audit and sign off the ESG content, as it will be a part of the Board of Directors report.
This will put sustainability on the Board of Directors’ agenda and at the center of company strategies.
If the EU Parliament and the EU Council reach an agreement by mid 2022, companies are expected to have to apply the new standards to reports published in 2024, covering the financial year 2023.
2023, you say, then why not just “wait and see”?
Well, first of all, you must be able to compare the data with a previous year. That means data from 2022. Second of all, it’s a lot of work. A lot. At Intito Finland, we have started to map the data sources and can confirm that, yes indeed, it takes time to gather all the information. Think about how most of the working hours of Finance are tied up by the obligations of the fiscal year.
In fact, the time to start getting on top of ESG is now.
Up until now, only large (500+ employees) have been concerned by the current NFRD directive. With the new ESG directive, all companies above 250 employees, 40 MEUR net sales or 20 MSEK net value, will be required to comply. The current NFRD reporters will be first out, they are required to report starting 1.1.2024 but the new smaller companies are required starting 1.1.2025.
Financial institutes are more or less prepared. Standards for green loans are being developed. Since the big corporations own a clear majority of all funds in the market, and EU wants to stimulate them to grant more green loans. As more money is funded by green loans, green investments get better terms while other loans are expected to become more expensive. Of course, provided that the banks know if a loan is green or not – thus the CSRD.
Even if you work at a smaller company not required to report ESG, there could still be strong reasons to do it. More and more companies have ambitious goals, and will simply not do business with companies who don’t fit their green strategy. Climate compliance should not only be measured as direct CO2 emission, but emission throughout the entire supply chain and product life cycle. This means suppliers depending on fossil fuel pose a serious risk to their climate goals.
The main impact is that your performance data will be available in a single database for all to see and compare when choosing sustainable partners, investors and suppliers. This new transparency will have consequences for all organizations.
You will need to find out:
Like your financial data, ESG data will have to be consolidated, reported and included in your planning tools (ESG planning will be required by EU).
And you will meet some challenges.
Defining ESG metrics. How to calculate CO2 emission is far from straightforward and still debated.
Structuring data. Chances are the data you are expected to report is unstructured and scattered all over the place.
Collecting data. Energy costs is usually easy to collect, but how do you get hold of the number of kilowatt hours and split them into green ones? Different formats is another challenge: the numbers on the energy bill PDF must somehow appear in your financial system. And where on earth did the final results from that employee satisfaction survey go?
A software platform such as IBM Planning Analytics and a well-defined process will probably resolve a lot of these issues and help you collect, verify, report compliant ESG data effectively.
This is a lot, but start by getting acquainted with the different standards for sustainability reporting: GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board) are good starting points. Read ESG-reports from companies in your industry. Talk to your board members and colleagues about what´s coming. Ask the questions we´ve just covered.
But first of all: make sure to share this article.
Don’t hesitate to get in touch with us.
David Pretorius, Senior Consultant, Intito Sweden
Catarina Asplund, Senior Consultant, Intito Finland